Understanding Payroll in Malaysia: A Beginner’s Guide
In the ever-changing business landscape of Malaysia, the importance of precise and efficient payroll is of utmost importance for both small startups and large corporations. Managing payroll is not just about paying employees; it involves ensuring compliance with local labour laws, calculating taxes accurately, and maintaining comprehensive records. This is where a reliable payroll system can truly make a significant difference.
For beginners, understanding Malaysian payroll can be quite complex, but as you become familiar with the basics, it’s actually relatively straightforward. Employee salary regulations are determined by both the Ministry of Human Resources and the Ministry of Finance. The Employment Act of 1955 encompasses most of statutory requirements, while income tax matters are overseen by the Income Tax Act of 1967.
Why is it essential for business owners to have a good understanding of payroll?
If you have employees, your payroll system is a vital component of your business, whether you opt to outsource it or handle it internally. It represents a significant expense, serves as the connection between your team and their roles, and is an ongoing operational necessity.
Becoming a payroll expert is rarely the primary goal for individuals who become employers. Nonetheless, possessing an understanding of this process can prove highly advantageous in the effective management of your business.
In this article, you’ll learn the key components of the payroll system and administration in Malaysia.
1. Registration
In Malaysia, every employer is obligated to enrol and register their workforce with the Employees Provident Fund (EPF), Social Security Organisation (SOCSO) and the Inland Revenue Board of Malaysia (IRBM or Lembaga Hasil Dalam Negeri, LHDN) regardless of the company’s size of the number of employees.
- Registration for employers:
Businesses employing workforce in Malaysia must complete registrations with LHDN for tax purposes, EPF for the compulsory retirement fund, and SOCSO for insurance benefits. - Registration for employees:
New employees need to be registered with both EPF and SOCSO to ensure their eligibility for relevant benefits.
2. Salary Structure
In Malaysia, an employee’s salary is composed of three primary elements; the basic salary, allowances, and overtime pay.
- Basic salary:
The fundamental amount agreed upon in the employment contract which ensures a fixed payment to the employee, regardless of any other factors. - Allowances:
Additional payments that are made to the employees such as housing, transportation, and medical care. - Overtime:
Payment for work done outside of regular working hours which is typically between 1.5x to 3x the hourly rate.
3. Statutory deductions
Statutory deductions are obligatory deductions that employers must deduct from an employee’s salary or wages by government laws and regulations.
- Income tax:
This is a source deduction, often known as Monthly Tax Deduction (Potongan Cukai Bulanan or PCB). The amount of income tax deducted depends on the employee’s income level, and potential tax relief or deductions can be reclaimed through annual tax filings. - Employees Provident Fund (EPF):
This is a compulsory retirement savings program applicable to all employees in Malaysia. Both employees and employers contribute a percentage of the employee’s salary to the EPF, which can be accessed upon reaching the age of 55. - Social Security Organisation (SOCSO):
SOCSO offers benefits to employees in cases of work-related accidents, injuries, or illnesses. Employers and employees both contribute a portion of the employee’s salary to SOCSO. - Employment Insurance System (EIS):
EIS is a social security initiative designed to provide insurance coverage for employees facing job losses, offering financial compensation for temporary assistance during such periods.
4. Leave entitlements
In Malaysia, employees have the right to mandatory leaves, which differ based on their length of employment and contract agreement. The most common include:
- Annual leave:
This is compensated time off that employees can use for vacations or personal reasons. The annual leave allocation varies, such as 8 days per year for employees with less than 2 years of employment, and increases with an employee’s length of employment - Sick leave:
This is paid time off available to employees when they are unwell or injured. The sick leave entitlement varies, for instance, 14 days per year for employees with less than 1 year of employment, and it increases with the employees years of employment. In cases of hospitalization, employees are eligible for 60 days of sick leave. - Maternity leave:
Female employees have the right to maternity leave both before and after giving birth. Eligible mothers are entitled to 98 days of paid maternity leave following childbirth.
5. Employee benefits and allowances
Beyond the fundamental salary, employers have the option to offer various benefits and allowances as part of their employees’ overall compensation packages:
- Medical and health coverage:
This can help with the expenses incurred for healthcare, including doctor’s appointments, hospital stays, and prescription medications. - Transportation reimbursement:
These allowances can offset the costs associated with commuting to and from work. - Incentive payments:
Typically distributed either annually or based on performance, these can provide a significant financial boost. - Phone allowance:
This is an allowance provided to cover employees’ phone bills - Work-from-home support:
This entails financial provision offered to employees to cover the expenses associated with setting up a home office, such as internet connectivity, electricity consumption, and office supplies. - Paid time off:
Reflecting on the number of days employees are entitled to take as paid leave annually, this benefit is valuable for employees looking to relax, rejuvenate, or explore new destinations while still receiving their full compensation.
6. Payroll cycle in Malaysia
The primary payroll cycle in Malaysia typically operates on a monthly basis, with salary payments distributed on or before the 7th day of the following month.
However, certain companies may opt for alternative payroll cycles, such as biweekly or weekly, particularly for part-time or hourly employees. These more frequent payment cycles align with the flexible work hours and compensation structures often associated with such roles.
7. Record keeping
Companies that employ full-time or part-time staff have a legal obligation to maintain comprehensive records of payroll-related records. These records encompass personal employee particulars, offer letters, monthly payslips, evidence of EPF and SOCSO contributions, as well as leave records. It is imperative to retain these documents for a minimum of seven years. The following are the crucial documents that must be retained:
- Personal information:
This includes the employee’s name, address, identification details, contact information, and emergency contact. - Offer letter:
This document outlines the terms of employment, including basic salary, benefits, job responsibilities, and other relevant information. - Pay slips:
Pay slips should be regularly provided to employees, and they should comprehensively display the employee’s earnings, deductions, and net pay. - Tax deductions:
The recorded amount of tax deducted from an employee’s pay should be documented. - EPF and SOCSO contributions:
The contributions made by the employee to the Employees Provident Fund (EPF) and the Social Security Organisation (SOCSO) should be meticulously documented. - Leave records:
These records should document the employee’s leave entitlements and the actual leave taken.
8. Termination and final compensation
An employee receives the final compensation when their employment is terminated, when they resign, or in the event of retrenchment. This final compensation includes the following components:
- Last received salary:
This represents the salary the employee earned during their last month of work. - Conversion of unused annual leave:
If the employee has any remaining annual leave days, they should be converted into monetary compensation. - Reimbursement for company assets:
The employee is required to return any company-owned assets, such as laptops, mobile phones, cars, or other assets belonging to the company. - Any other benefits, commissions, or bonuses as specified in the employment contract:
These additional benefits, commissions, or bonuses stipulated in the employment contract should be disbursed as part of the final compensation package.
Common payroll compliance challenges to look out for in Malaysia
The foundation of payroll compliance lies in adhering to compulsory employment regulations as the primary step. Payroll mistakes can create complications for both the organization and its workforce.
Here are some of the most common sources of payroll challenges that can result in non-compliance, which employers should be vigilant about:
1. Inaccurate employee information and records
It is imperative that your company’s HR department collects essential and precise data and records from new employees on their first day with the organization. Beyond personal details, it is important to verify that new employees provide accurate employment and payroll-related records.
Incorrect information can lead to wrong payroll calculations and tax reporting. Conducting an annual data verification process is advisable to maintain the accuracy of your employees’ records.
2. Significant payroll errors concerning statutory authorities
Penalties can be avoided by adhering to the obligatory statutory regulations. Ensure the accurate application of contribution rates, cross-check payroll reports with the total contributions, and align the contribution month with the payment month.
Incorrect contributions can accumulate over time, leading to difficulties when attempting to rectify these mistakes.
3. Unreported non-monetary benefits, perks, and compensation
Additional benefits provided to employees should be integrated into the total compensation package, even if they are not disbursed through the regular payroll process.
A comprehensive compensation report is essential as it plays a pivotal role in influencing tax implications for both employers and the employees.
4. Failure to comply with current regulatory updates
In Malaysia, there are four regulatory entities that impact the regulations governing payroll processing. It is crucial to remain well-informed about the latest regulatory revisions affecting your employees’ payroll.
The accumulation of incorrect data due to non-compliance with these updates can lead to complex and challenging corrections.
Get started on payroll effectively with CentralHR
If you’re looking to streamline your company’s payroll processes, CentralHR offers a hassle-free and intuitive way to get started. CentralHR’s payroll feature seamlessly integrates with your current system and has received approval from LHDN (Inland Revenue Board Malaysia).
CentralHR’s team of payroll experts are highly trained and possess cutting-edge payroll systems to process even the most intricate payroll accounts allowing business owners and HR teams to to focus on what matters most – their people.
Visit centralhr.my now or reach out to one of our payroll experts today to discuss how outsourcing your payroll tasks can help with your company’s growth and profitability.
